How enforceable are restrictive covenants and what can you do to ensure yours stand up in court?

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Restrictive covenants – the basics

Restrictive covenants are included in employment contracts to restrict certain commercial activities of workers once their employment is over.

They are often used in employment contracts with employees who have access to confidential information or hold valuable relationships with customers, suppliers or other employees. These restrictions aim to protect businesses by preventing former employees from using the knowledge and information gained at the workplace for the benefit of their new employer.

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They may be used alongside garden leave provisions, which seek to restrict the activities of an exiting employee by keeping them out of the business and away from key contacts or sensitive information during their notice period.

 

Types of restrictive covenants

The standard types of restrictions which can be used by employers are:

  • non-competition covenants - restrictions on former employees working for a competitor;
  • non-solicitation covenants - prevent poaching of clients/customers/suppliers of the former employer;

  • non-dealing covenants - prevent a former employee from dealing with former clients/customers/suppliers,

  • non-poaching covenants – which prevent an employee poaching former colleagues

 

But are they enforceable?

In short yes, however, to prevent a court viewing the restriction as being ‘in restraint of trade’ there are number of certain conditions that must be met. In order to be enforceable, the employer must be able to show that they are:

  • reasonable
  • necessary to protect legitimate business interests
  • of a duration no longer than is necessary to protect those interests

If you seek to deny an employee the right to work in a specific industry or profession, this will be taken seriously by the court. For example, an employment contract that imposes an absolute ban on a person working for a direct competitor, even for a short period of time, is unlikely to be enforced.

The important point to note for employers drafting employment contracts is that whilst restrictive covenants can protect your business interests, their existence in your employment contract does not necessarily mean they are enforceable.

The use of restricted covenants should also be relative to an employee’s position in the business. For instance, a senior manager with access to commercially sensitive information is likely to be subject to more substantial restrictions, than a junior employee with no access to sensitive information. They should also be tailored to the specific role & the industry expectations of the market/sector you operate in.

The assessment of the reasonableness of a covenant is at the time they were entered in to. This can create challenges when employees change jobs, are promoted, etc. If a covenant was unreasonable in a former, say junior role, it cannot automatically ‘become’ reasonable for a subsequent more senior role.

It is important therefore that restrictive covenants are carefully drafted. In the event that an employee challenges their use in court, employers will need to convince the court that the restrictions were sufficiently narrow so as to be properly enforced.


What steps do employers need to take?

The important point to note for employers drafting employment contracts is that whilst restrictive covenants can protect your business interests, their existence in your employment contract does not necessarily mean they are enforceable. 

EEF recommends periodically reviewing your employment contracts and to consider updating covenants when an employee is promoted or moves to a new role. EEF members can also ask their adviser about our free enforceability audit.

 

How can EEF help?

EEF’s HR & employment law team can undertake an enforceability audit to strength check your employment contracts, we’ll identify potential gaps or missing covenants to ensure employers are safeguarded against some of the issues involving restrictive covenants.

For further information on how we can assist, please speak to your EEF adviser or contact us on 0808 168 5874.

Author

Head of Legal for EEF’s Key Accounts

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